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Commonwealth’s Bloom on Acquisitions: Firm Is Open, but Cautious

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As other broker-dealers continue to embrace acquisitions as a growth strategy, leaders of Commonwealth Financial say that the firm would consider such a move, but it has very tough standards.

“We will look at anything,” said CEO Wayne Bloom (left), in an exclusive interview with AdvisorOne on Saturday, during the independent-contractor BD firm’s national conference in San Antonio. “But look at the profile of most firms. Maybe 15% or 20% of the advisors could fit our production requirement, business mix and culture. Why would we take on the other 80%-85% of [those] reps?”

Commonwealth, Bloom explains, is more keenly focused on “finding the advisors we want,” which generally means those with $200,000 and up in yearly fees and commissions. He admits that this represents “slower growth, but this is the right growth% for us.”

As an example of broker-dealer firms growing through acquisition, last Wednesday, First Allied Holdings said it planned to buy the Legend Group from Waddell & Reed (WDR). It would boost the number of reps affiliated with First Allied by about 450 to some 1,500 advisors with $30 billion in assets under administration.

First Allied Securities Chairman Joel Marks says this type of transaction is essential for independent firms of its size. “Margin compression in this business is getting bigger, so you have to grow. It is not an option,” he said in an interview on Nov. 1.

Recruiting Momentum

“We actually can recruit,” said John Rooney (right), managing partner of the firm in San Diego, during the Saturday group interview with Commonwealth’s leaders. “No one is throwing out money in the independent world; only the wirehouses do. You have to compete on service, technology and what makes the broker-dealer effective. There is only a handful on the top tier, and those at that level are doing okay organically. Others are having a harder time.”

Commonwealth executives say the firm has attracted about $36 million in yearly fees & commissions to date with newly recruited advisors, with the average production level being about $405,000. (About 70 of all advisors that joined in the past 12 months attended its Nov. 2-5 national conference in San Antonio.)

“Our model does not discriminate, and we provide the same service for all financial advisors,” said Andrew Daniels, managing partner of field development, in the same interview. “If we pick up 200 advisors or 20, it has no effect really on our margins and the marginal change that comes from these new reps, because we all rise together.”

Still, the firm does need to take scale into account over all, Bloom said, noting that the firm has spent about $120 million on technology over the past five years or so. “But with the right scale, we can weather the things” that are reshaping the industry, he said. “And can keep investing and not let service slip.” In Bloom’s view, it all comes down to “treating all members of your community well and recruiting the right people,” he noted. “It’s about managing your business: adapting to change but keeping your core DNA and focus.”

Commonwealth’s 1,400-plus advisors now produce about $700 million in yearly fees and commissions, 70% of which is fee based. The independent broker-dealer “is marching toward” becoming a $1-billion firm with a $500,000 production average over the next few years, while maintaining its reputation for boutique-level service, Bloom says.

Bringing on a large number of reps with under $200,000 in production, he adds, could “dilute our offering.”

As Daniels (left) acknowledges, keeping all advisors happy with its high service level is paramountm and stresses that it’s more important than adding a large number of new advisors. “My standard for growth is this: How does a rep who joined us five to 10 years ago feel about us today? adding ‘Why does this make us attractive to prospects?’” What is more important, he said, “is having a careful, strategic evolution.”

Again, Commonwealth executives say that this all comes back to sharp focus on top advisors, which has brought the firm success in the past. In the independent broker-dealer world, “We believe we have the highest average production and retention rates as a result. We do not want to derail that success,” Daniels said.

Recruited advisors, the executives note, do give other reps “an energy boost.” “Veteran advisors get energy from seeing how happy the new reps are,” said Rooney. “It’s new blood,” while arguing that new reps gain a lot from their more experienced Commonwealth colleagues.